Dave Thornton is the CEO and co-founder of Vested, a platform designed to help startup employees unlock the value of their stock options.
In this episode, Dave dives into the complexities of stock options, the challenges of providing liquidity for startup employees, and how Vested is bridging the gap by offering innovative funding solutions. We also discuss the evolving private markets, the role of secondary markets, and the increasing need for liquidity as companies stay private longer.
Please enjoy our conversation with Dave Thornton.
The Investipal Podcast is produced by www.investipal.co. Past guests include Meb Faber, Brent Beshore, Peter Lazaroff, Douglas Boneparth, Jamie Hopkins, Tyrone Ross and many more.
Follow us on LinkedIn: www.linkedin.com/company/investipal | www.linkedin.com/in/cameronhowe/; Twitter: www.twitter.com/camhowe16 | www.twitter.com/investipal; Tiktok: www.tiktok.com/@camhowe16 | www.tiktok.com/@investipal; or Instagram: www.instagram.com/investipal/
Find Dave Thornton at:
https://www.linkedin.com/in/davejthornton/
00:00 Introduction and Overview of Vested
01:06 Evolution of Vested's Services
03:39 Determining Fair Market Value for Stock Options
04:33 Vested's Target Market: Rank and File Startup Employees
06:55 Impact of Market Conditions on Stock Option Funding
08:18 Vested's Focus on Early and Mid-Stage Companies
10:35 Vested's Exclusion of VC Funds as Counterparties
16:06 Challenges of Staying Private for Startups
20:48 Alternative Investments in Venture Capital
24:00 Liquidity and Redemption in VC Index Funds
25:39 Liquidity Events in Vested's Portfolio
27:14 Accessing Vested's Investment Vehicle
28:41 Closing Remarks
Cameron Howe:
Hi everyone, welcome back to the Investipal podcast. My name is Cam. I'm pleased to welcome Dave Thornton on today. Dave is the CEO and co-founder of Vested, a platform for startup employees to exercise their options. Dave, thanks for coming on today.
Dave Thornton:
Happy to be here.
Cameron Howe:
So as an individual who spends a lot of time in the startup world, I'm curious maybe just a quick overview on Vested and what you guys are all about and how you're helping provide some liquidity to startup employees.
Dave Thornton:
Yeah, happy to describe it. Vested's liquidity solutions are a bit of an accident. Originally Vested was a company whose primary job was to help startup employees understand their equity at all. Just what is this? What's the difference between stock and stock options? What's the difference between incentive stock options and unqualified stock options? Is your option grant fair? Vested was originally kind of a knowledge provider, but in our first year, year and a half of existence, some of our user base that initially came to us looking for education around what was typically stock option grants, but their equity writ large, started to come to us looking for money. And when we investigated what the use case for the money was, it was almost entirely an employee who had recently departed their startup for whatever reason, finding out typically for the first time that they now have 90 days within which they have to exercise their vested stock options or else they lose them entirely. And that was kind of the beginning of our journey into providing, I guess liquidity is the right word. We don't think of it as liquidity because...
Cameron Howe:
Mm-hmm.
Dave Thornton:
...liquidity has a cash-in-pocket connotation, but funding for stock option exercise, so that the employee who doesn't have the $70,000 that they all of a sudden need to find within 90 days can attain it and use it to exercise their stock options and pay taxes.
Cameron Howe:
So does that mean that you would be there essentially providing them a loan to buy those options in which they own now the equity piece behind it, or are you purchasing the equity from them?
Dave Thornton:
Yeah, very good question. So we could have gone either way. And there are providers out there in the market that do loan-like products. We chose for the purposes of mitigating regulatory risk to do a straight purchase where we're buying only the minimum number of shares necessary for the employee to get all the money they need to do both their exercise and the related taxes. The goal is for them to own as much as possible and for them not to have any loan-like scariness hanging over their head.
Cameron Howe:
Okay. Interesting. So, with the private markets in general, especially in like the startup world, this isn't priced daily or intraday like a typical stock would be. So is Vested helping provide a fair market value or is that more on the company to say, "Hey, our last round or our current valuation is $10 million. You will be receiving the options with an equity value, fair value of that $10 million," or do you guys do some updated pricing as a result of that?
Dave Thornton:
Yeah, that's a very good question. And actually, in order to answer that question holistically, I think I need to describe a little bit more about the part of the employee market that Vested serves. So, when the interest first came inbound from our own user base for capital around this particular use case, we thought it was very cool, but we were also like, this is not a new problem. There has to be an existing market for this. When we looked at the existing market, what we saw was, although there are providers of funding for stock option exercise, they are primarily focused on senior people that were leaving late-stage private companies. Think of Stripe and SpaceX as name brand examples. And the folks that were represented in our user base that were coming to us were what we would call the other 99% of startup employees, primarily rank and file startup employees that need $30,000, $120,000, $80,000, some number that is big for an individual but below the "who cares" threshold for your typical investment firm that's trying to put millions of dollars to work. And so conceptualizing ourselves as the stock option funding provider for the other 99% of startup employees comes with a handful of operational issues. If we're helping people from roughly 30,000 US-headquartered venture-backed companies, it is nearly impossible to price 30,000 venture-backed companies as an outsider. So what we did to start was rely on the pricing that currently existed. For every company that has common stock, there's a regulatorily mandated 409A valuation that must be done, produced by an independent valuation provider every year. It subsequently goes up to the company's board and is approved as the current fair market value of that company's common stock. To make our lives easy in the beginning, we would tend to buy at the price that already existed, which is the board-approved company fair market value.
Cameron Howe:
Interesting. Okay, so that 409A happens, let's say January 1st. If they're coming to you September 30th or after that, you're still reflecting it back to that previous 409A valuation?
Dave Thornton:
Yeah, which is typically okay in a normal world where markets have not gone down or up recently. Venture-backed companies tend to raise rounds every two years on average, so it's actually perfect timing and very timely and up to date to use foreign NAs or current FMVs, which are refreshed a minimum of once a year. It's only in markets where things have moved fast recently, that it may not be appropriate.
Cameron Howe:
Gotcha. So with that said, are you able to pinpoint, you know, like I see there's private market data providers out there who look to provide some insights around what's going on in the startup world. A lot have seen a reduction in deal volume and valuation compression and all of that. Are you seeing the same thing when it comes to Vested and access to that pool of 30,000 VC-backed startups out there?
Dave Thornton:
Well, I guess there are two parts to your question. One's the data thing, and then the other is the access on the supply side. No, in fact, the opposite. So call it somewhere between a year and a half and two years ago when the private market started to crash, one of the things that you saw a ton of was companies, whether or not they needed to survive, doing belt-tightening layoffs. And layoffs are one of the many reasons that people leave startups, and layoffs produce deal flow for us. So we actually saw an uptick during that period of time. And the uptick has kind of maintained, not all the way through now, but it wasn't like a three-month uptick, it was like a year-and-a-half uptick.
Cameron Howe:
Okay. So with that said though, around the actual, what the data is painting a picture around, are we seeing valuations rebound and volumes? Maybe it's not volumes, but on the actual deal and company valuation side, are they coming back to life?
Dave Thornton:
So the best visibility we have into that, there are many lenses through which you could answer that question. The one most people mean when they ask a version of that question is, are primary deals—like fresh capital into companies—going in at new arm's length prices? That we don't have, but we have plenty of visibility because we have lots of data sources. The best visibility we have is actually when employees come in and they share the information necessary to understand what their exercise and tax obligations are for their stock option exercise. And one of the things we've seen very clearly is employees have to understand what the current FMV is, because it produces the tax consequences of their exercise, which can sometimes be bigger than the actual strike price they need to pay. We've seen FMVs get written down pretty dramatically in the last year and a half. It's hard to paint with too broad a brush because the later-stage companies got hit a lot harder than the earlier-stage companies from what we can tell. But overall, FMVs are probably down like 50%.
Cameron Howe:
Oh, wow. Okay. You hear a lot of companies doing down rounds, but I thought we had the bottom established about a year ago. So you're saying it's still quite depressed and hasn't really seen a bump off of that?
Dave Thornton:
I think the bottom's been established. However, there's not been an FMV recovery yet. So we're still down there where we might have gotten to in the last year or six months.
Cameron Howe:
Right. So is Vested primarily focused on later-stage companies? Are you seeing any dynamic within the actual company life cycle? Like, do you ever deal with a seed-stage or series A-type company in helping facilitate liquidity there?
Dave Thornton:
Yeah, we can help companies of almost all stages. We're artificially restricted at the moment at series A. We've got a couple of series C deals in our prior portfolios, but for the most part, it's A and above, which is still quite early in terms of private company maturity. We can handle any stage, and we tend to see rank-and-file employees. So that includes people leaving the Stripes and SpaceX's of the world. But because the market that pre-existed us had coalesced around the late-stage companies, we see more early and mid-stage stuff.
Cameron Howe:
Gotcha. So we're talking a lot on the company side. Do you ever deal on the opposite end with the funders, with the funds looking for access to startup capital as well? Is there a lot of dry powder sitting on the sidelines waiting to reinvest back into a more reasonably priced private market?
Dave Thornton:
No, but for a very practical reason, not because it's not a good idea. I think we should work more with VC funds and they should work more with us. When we started, we initially did our deals with employees directly on a forward basis, meaning we would purchase the subset of shares necessary to get them all their money for their exercise and taxes. But we would give them the money today, and they wouldn't actually deliver the shares until transfer restrictions had lifted. Initially, we made that choice because our goal was to help somebody with eight days left on their clock get their exercise done before expiration. And if you have eight days left, you can't possibly bring in a company to do a right of first refusal process followed by a retitling of shares and all that stuff. In our initial fund, after we got the deal done with the employee and after the employee took our money and did their exercise, we would go back to the companies and say, "Hey, we just helped out Kim for $34,000. Would you mind retitling just the shares that we bought?" The companies gave us clear feedback that they would prefer not to be involved in the transaction, which is unusual. You'd expect a company to care when their shares are being transacted, but they didn't want us on the cap table for $34,000, even though it might be the most value-added $34,000 ever. There were several frictions, such as companies not wanting to redo their 409A valuation. So, for those reasons, we continued working directly with employees. That leads to the VC question because VCs tend to have direct relationships with management teams, and they don't want to do deals outside the management team's purview, which is why we don't work much with VC funds.
Cameron Howe:
But would that be like the primary VC fund though? I remember listening to the All In podcast, and Jason Calacanis was saying he's trying to take like a 2% position in Anduril. And I imagine he's doing so by buying secondary through departing employees. So do you have like, maybe not their primary fund owner, but these other notable people who weren't privy to the primary round trying to get exposure now?
Dave Thornton:
Yeah, for folks that don't have that management company relationship to worry about, then yeah, we can totally help them out. And as long as we stay in our lane prescribed by the company, which is we're helping a small number of ex-employees for small size, then yeah, we can work with any partners, any capital partners.
Cameron Howe:
Do you see it being a benefit? Like there's a lot of companies that have, like Stripe, have not gone the public route and have stayed private for a very long time. And there's a growing trend—I forget, I'm going to throw a random number out—but the average time to IPO is like a decade or something now. I don't know, you probably know better than I do.
Dave Thornton:
Yeah, it’s 10 to 12 years at this point, which is a long time.
Cameron Howe:
Yeah, so you'd think that like an employee might want to liquidate their holding then. Do you see that as being a barrier for startup employees now, that lack of liquidity in the market? You know, there's the lure of joining a startup, it goes public, everyone gets rich, and now it's this long waiting game.
Dave Thornton:
Most definitely. Yeah, it is definitely a problem. Employees stay at a startup on average three years. So you can do the math. If it takes 10 to 12 years to get to a public exit—and even if it takes six years to get to an acquisition or something like that, a version of an exit that's still a good exit which would produce liquidity for you—the employees are typically not there. And so it would be nice to have a fully functioning secondary market where all the names traded at reasonable prices so that employees could not only find the capital to exercise their stock options but occasionally sell some of their stock when they need to put a down payment on a home or something like that. But it just is not the way that the world works today. I mean, hopefully, some of the work that we're doing in helping the long tail of rank-and-file employees across lots and lots of companies, rather than a small handful, does something to move the world in the right direction. But it’s a big problem.
Cameron Howe:
Absolutely.
Dave Thornton:
And I kind of think that there are benefits to everybody in the secondary market’s development. So I think the founders that really make an effort to try to build the secondary markets with capital providers on behalf of their employees will see recruiting and retention benefits. Because everything else equal, you'd much rather work at a company where the stock is not just a paper lottery ticket but can be turned into cash from time to time. And once the first recruiting and retention winners actually get the better people and keep the better people, I think it will roll to the rest of the companies.
Cameron Howe:
I wonder though, like I have seen, I don’t know how many ATSs are out there, you know, those alternative exchanges, none of which seem to have the promised liquidity that they're aiming for.
Dave Thornton:
It’s because there’s no buy-side. You have to have data on the companies for the buy-side to show up. There are plenty of employees who will potentially be sellers at various points, and early investors are always going to want looks to unload before year 10 or 12. But if you’ve never heard of this company, even if they’re doing great and they just took an up round, and you can’t see financials and have no other real way to vet it, there’s just no demand for that name. That’s my view of the reason why there’s only ever been a few hundred names that trade on the secondary markets, despite the fact that there are 30,000 and change venture-backed companies.
Cameron Howe:
What do you think that big inhibitor is? Is it just the regulatory burden it brings onto a management team to go public?
Dave Thornton:
Do you mean the inhibitor for a company going public or…
Cameron Howe:
Yeah, like the reason they’re staying private for longer—is it just that they don’t want to be priced? They don’t want to provide a pathway to liquidity?
Dave Thornton:
Yeah, just my two cents as a founder is that it sounds like a pain. Not the pathway to liquidity thing on behalf of employees, which I’d be more motivated by, but my old company was acquired by a company that subsequently went public. And I got a little bit of visibility into what it was like to prepare for quarterly earnings—and it’s terrible. I don’t like it. I don’t know why I would sign up for that, if I didn’t need to.
Cameron Howe:
Yeah, you always see that curve after the company's lifecycle, and once it IPOs, it typically IPOs after all of the growth, for the most part, is done. So it seems like they’re laser-focused on growing the company. And maybe it’s a correlation, not a causation, but once they go public, the growth stalls. And either the management team is perfectly predicting that, or all of that extra reporting ends up slowing down the innovation behind the scenes and prevents them from growing as quickly.
Dave Thornton:
I feel like it’s more likely the first—that all the growth is happening while the company’s private, mostly because it’s possible to stay private these days for longer and longer periods.
Cameron Howe:
So what are you seeing in terms of, you know, we have a lot of, besides retail investors who listen to this, a lot of investment advisors who tune in as well. And there’s a growing theme around alternative investments, especially in the VC space. Do you have any thoughts on how they can get exposure to private equity or venture capital?
Dave Thornton:
Yeah, plenty. I mean, this has been the mirror side of the employee needing cash to fund their expiring stock option exercise journey—us understanding who the investors are that care about being on the other side of that employee. So one thing I should mention is that the capital we provide to employees tends to come from a dedicated, committed pool that we've already raised from investors. What we do is help employee by employee, small ticket by small ticket, leaving many companies of all stages and sectors. The product, the investment product that we've created to date, is almost like a proto-VC index fund. And in thinking about that construct, we've started to understand at least parts of the investor market that have never had access to VC or if they could have access, they didn’t have the access they liked.
Cameron Howe:
Okay.
Dave Thornton:
What we've seen is a couple of things. One is you need to be able to write a pretty big check in order to get into what you’d call the brand name VC firms. There are plenty of people that can write, again for a regular person, big checks that are not the $10 million you need to get into, say, Andreessen. And they’ve been locked out from an access perspective because they can’t write a check that’s big enough. There’s another set of investors that maybe they could write the check if they wanted, but they’re nervous about single-manager, single-vintage type risks. Despite the fact that if you do well in VC in your prior fund, you are likely as in any other asset class or more likely to do well in your next fund, the proportion of people that were top quartile fund managers last vintage and are also top quartile fund managers in their subsequent vintage is like 49%. So it’s the biggest number you see—like I think private equity is in the thirties, and hedge funds are way, way lower. But that’s not better than a coin flip. So there’s a nervousness that people have, aside from just being able to get access in the first place. And so, for folks locked out of VC for those reasons, an index fund construct makes a ton of sense. You can write one ticket and get access to very broad coverage within the asset class, inclusive of the companies backed by Sequoia, Andreessen, and all the big names. And because you’re effectively getting manager diversification, the single-fund, single-vintage, single-manager risk is as mitigated as it’s going to be. So I really like the index fund construct for high net worth individuals that want to be in VC but haven’t had the chance or haven’t been comfortable.
Cameron Howe:
What does the redemption look like for those people participating? Since it’s more of an index fund, does that mean there is more liquidity on the investor side as well, or they could end up redeeming intra-year?
Dave Thornton:
It kind of depends. Fund structure has a lot to do with the ability to redeem. But liquidity—what the investor wants is the ability to get some money out of the fund periodically. And that can come in a number of different forms. Redemption is just one of them, where you’re selling all your interest in the fund. The index construct definitely does a good job of producing liquidity, even if it’s done in a private fund with a 10-year lockup. If you put a thousand companies into a fund, I promise 50 to 100 will be liquid at some point next year, even though I may not be able to tell you which 50 to 100 that will be right now. So the index fund construct does a good job of producing periodic liquidity. Separately, there’s a fund structuring element, which is whether there’s any way to make this fund provide liquidity if people want to get all the way out. It’s not as good for that, only because it’s a little hard to support liquidity if there aren’t buyers for your shares. At the end of trying to get somebody out of a fund, if there’s not somebody who wants to get in to match them up with, you have to sell assets in the fund. And, to our prior point, there’s not a functioning secondary market for most potential assets in a VC fund.
Cameron Howe:
What would you say of your universe of coverage—is it like 10% that have some sort of liquidity event that is returning capital back from those shares?
Dave Thornton:
Well, putting aside the last year and a half where the markets died and stayed dead for a while, and are only starting to come back to life in terms of the production of liquidity events, corporate-level liquid events. When we were originally modeling the trade that we’re doing right now, we expected about half of the portfolio to go to zero. That’s two different types of zeros—corporate-level zeros, and sometimes a company can have a fire sale acquisition where some of their investors get money back, but common stockholders get nothing. We expected about half zeros, and the other half non-zeros. There was a not-quite-uniform, but reasonably predictable, batch of liquidity year over year, until you get to the handful of companies that are holding their breath 10 to 12 years for an IPO. We expected about half to be liquid in our initial modeling, with 5-10% liquidity yearly towards year five.
Cameron Howe:
Interesting. Okay. So with that said, if there’s anyone out there looking to get access to something like this, besides reaching out to you directly—since I know you’re a busy guy—what’s the best pathway for them to get access to the investment vehicle that Vested offers?
Dave Thornton:
For high net worth individuals who have their money managed, the best thing to do is to talk to the financial advisor managing their money. The best thing for financial advisors is to go to the highest level within their organization—hopefully, there’s a team that sources and diligences potential fund investments on behalf of the platform. I and my team have bandwidth to work at that platform level. The best way to get ahold of us is to go to Vested.co/investor through someone at the platform level that has a seat and diligences many managers and funds.
Cameron Howe:
Okay, Dave. Well, I really appreciate you coming on today. It was a very interesting conversation. As a founder myself, it’s something I keep an eye on for my employees and our pathway to liquidity. So I think what you’re doing is a very positive thing for the industry, especially given the headwinds and the trend of companies staying private for longer. I really appreciate you coming on today, and we’ll leave a link in the show notes for anyone interested in learning more about Vested.
Dave Thornton:
Awesome. Thanks for having me on, Cam. Appreciate it.
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